The Impact of Lower Euribor on Variable Mortgages: Will It Reduce Prices?

Lower the Euribor. It’s not any joke. Has passed. It’s normal to be surprised, because it had been rising for 19 months in a row. You did know, right? You have verified it many times in the payment of your loans. Now it stops the uptrend of it, but… Will this serve to reduce the price of variable mortgages? The answer is given by the financial comparator HelpMyCash.com.

They explain that the one-year Euribor, which is the index with which the interest of variable mortgages in Spain is calculated, will close August with a value of around 4.072%; slightly lower than in July (4.149%). This ends a cycle of promotions, which has led this reference to trade in negative to exceed 4%, something that has not happened since 2008.

Is this a respite for those mortgaged at a variable rate?

“Yes and no. We are at the beginning of the end of the Euribor rises. However, it is still likely that there will be increases in this index in September or October. In addition, at least during the next few months, the installments of the variable mortgages that are reviewed will increase, since the Euribor is still trading above the values ​​it registered a year or a semester ago,” they clarify.

The end of the increases in variable mortgages is near

The comparator’s mortgage specialist, Miquel Riera, explains that the one-year Euribor will close August below the principal interest of the European Central Bank (ECB), whose value is 4.5% after the last rise in July. However, according to this analyst, “this is not usually the norm.”

This index represents the average interest at which the main banks of the continent lend money to each other, with a repayment period of 12 months. Therefore, when these financiers find it more difficult to finance themselves through the ECB, they normally apply higher interest on their interbank loans and the Euribor rises.”

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The slight drop in this index reflects, according to Riera, that “entities apply lower interest on their interbank loansbecause they foresee that the ECB will stop raising its rates in the medium term”.

In other words, they adapt their prices to the pause that they expect to occur within the next 12 months. It should be noted, in this sense, that the Euribor has a tendency to anticipate changes in ECB rates.

However, they add, this pause does not have to occur immediately. The president of the European institution, Christine Lagardestated a few days ago that “the fight against inflation [de la eurozona] it is not won yet!, since its objective is to reduce it to 2% and its current value exceeds 5%.

Differences between fixed, variable and mixed mortgage

For this reason, from HelpMyCash they affirm that it is probable that there will be a new rise in rates in September or October for contain inflation, that the Euribor trades slightly upwards in the coming months and that it stabilizes between 4% and 4.5% before the end of the year; still below the interest of the ECB.

From the comparator they do not rule out that the ECB will pause the rate hikes, as predicted by various players in the financial market. For this to happen, there should be 2 conditions: that inflation in the euro area falls at a faster rate than expected in August or September and that the continent’s economy is on the brink of recession in the third quarter.

Variable mortgages will become more expensive by up to 2,750 euros a year

The drop in August, moreover, will not lower the price of variable mortgage installments that will be reviewed soon. According to the comparator analyst, The interest on these products is updated with the new value of the Euribor every 6 or 12 months..

And since the current price of this index is significantly higher than that of a semester (3.534%) or a year (1.249%) ago, the holders of these loans will have to pay more expensive monthly payments.

What is the public debt?

For example, a person has an average variable mortgage of 150,000 euros with a term of 25 years and Euribor interest plus 1%. If the loan is reviewed annually with the August index value, the fees will rise from 654 euros to 883 euros; a monthly increase of 229 euros (almost 2,750 euros more per year).

And if the update is biannual, lThe monthly payments will increase from almost 837 euros to 883 euroswhich means an increase of about 46 euros per month (almost 280 euros more per semester).

The increase in the cost of the monthly payments, yes, will be higher or lower depending on the amount and the pending term, the interest that the variable mortgage and the years that have passed since their hiring.

The mortgage payment can be reduced

There are methods, however, to soften this increase. According to Miquel Riera, those with a mortgage who have a significant amount of money saved can use it to repay part of their debt in advance. Thus, they will be able to reduce the amount of their monthly payments (or shorten their term, if preferred) and, incidentally, save on interest.

Likewise, they comment on HelpMyCash.com, there is the option of renegotiate the conditions of the mortgage with the bank to reduce the feeeither through the reduction of the differential (the part that is added to the Euribor) or the change from a variable rate to a fixed or mixed rate that is lower.

Why everyone is talking about mixed-rate mortgages: advantages and disadvantages

In order to change this modification, it is necessary to reach an agreement with the entity, which can reject the agreement if it does not suit them.

Another alternative, if the client has a good profile, is to transfer the mortgage to another entity willing to reduce the differential or to convert your variable interest to a fixed or mixed ratewhich is an operation known as surrogacy.